Bank stocks weren’t winning any fans Wednesday as the sector sold off on worries of negative interest rates.
(ticker: WFC) was one the biggest laggards of the big banks, falling 6.3%, while
(GS) were off 3.4% and 3.1%, respectively. The
KBW Nasdaq Bank Index
(BKX) dropped 4.7%, exceeding the 1.8% drop in the
Among the big banks, Wells Fargo is more interest-rate sensitive as it derives roughly half of its revenue from community-banking operations.
Traders have recently priced in the possibility of negative rates—despite protestations from Federal Reserve officials, including Fed Chair Jerome Powell, who said in a webcast on Wednesday that negative rates are “not something that we’re looking at.”
But Wall Street still believes interest rates could turn red.
“Did [Powell] rule it out unconditionally? NO. But who would? That is like answering a question with a 100%. If the world does go into a total tailspin, he would likely have to use negative rates,” Dennis De Busschere, analyst at Evercore ISI, said in an email.
Chris Senyek, chief investment strategist at Wolfe Research, said in a note Wednesday: “The Fed moving to negative rates is not part of our base case. However, the probability for negative rates in the U.S. is increasing, and we believe that this will at least contribute to yield curve flattening over the intermediate term.”
Even without negative interest rates, there is no denying that bank stocks have been under more pressure than the broader market.
The S&P 500 has gained roughly 25% since the March 23 bottom, while the KBW Nasdaq Bank Index is up 12%. Year to date, the broader market is down 12.7%, while bank index has fallen 45%.
Interest rates might not go negative, but they are expected to remain low for years as the U.S. recovers from the economic crisis spurred by the coronavirus. Low rates pressure the interest income banks can earn.
And that isn’t all that has been weighing on the sector. Although analysts and policy makers have touted the health of the financial system—noting that, unlike during the 2008-09 financial crisis, banks aren’t the cause of our current crisis—it is still navigating uncharted waters. Loan losses are expected to mount as stay-in-place orders have hurt businesses and households. Banks already boosted their loan-loss reserves in the first quarter, and analysts expect that to continue in future quarters.
Further putting pressure on bank stocks…